Monday, December 30, 2013

Question #7 for 2014: What will happen with house prices in 2014?

by Bill McBride on 12/30/2013 11:45:00 AM

Earlier I posted some questions for next year: Ten Economic Questions for 2014. I'll try to add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2013.

7) House Prices: It appears house prices - as measured by the national repeat sales index (Case-Shiller, CoreLogic) - will be up about 12% or so in 2013. What will happen with house prices in 2014?

Calling the bottom for house prices in 2012 was correct, but I underestimated how quickly prices would increase in 2013.

Case-Shiller House Prices IndicesClick on graph for larger image.

This graph shows the year-over-year change in the Case-Shiller Composite 10 and Composite 20 indexes.

The Composite 10 SA was up 13.2% YoY in September, and the Composite 20 SA was also up 13.2% year-over-year. Other house price indexes have indicated lower gains (see table below).

Note: the year-over-year gain in 2010 was related to the homebuyer tax credit.  However, in 2010, prices were still too high based on fundamentals.   However, when prices started increasing in 2012, prices were more in line with fundamentals based on price-to-income, price-to-rent and real house prices.

Although I use Case-Shiller, I do think the index overstates national prices due to the inclusion of foreclosures and the weighting of certain coastal areas. The following table shows the year-over-year change for several house prices indexes.  Clearly prices were up in 2013, but there was a pretty significant difference between the various measures of prices:

Year-over-year Change for Various House Price Indexes
IndexThrough Increase
Case-Shiller Comp 20Sep-1313.2%
Case-Shiller NationalQ311.2%
FHFA Purchase OnlyOct-138.8%

Some of the key factors in 2012 and 2013 were limited inventory, fewer foreclosures, investor buying in certain areas, and a change in psychology as buyers and sellers started believing house prices had bottomed.

In some areas, like Phoenix, there appeared to be a bounce off the bottom - but that bounce appears to be slowing. CoreLogic economist Sam Khater wrote today: Low-End Home Price Correction Over, Portends a Substantial Slowdown in Prices
Analyzing low-end versus high-end price trends reveals two stylized facts. First, low-end price changes and levels lead high-end prices and levels by six months to a year. The low-end price trough in March 2011 was clearly foreshadowing that the market was set to recover. Second, low-end prices are much more volatile than high end prices, which sometimes makes turning points easier to catch.

While there are some caveats, clearly lower-end home prices are decelerating, especially in the former boom/bust markets of the Southwest. More importantly, the magnitude of the declines presages lower growth for prices overall.
In 2014, inventories will probably remain low, but I expect inventories to continue to increase on a year-over-year basis. This suggests more house price increases in 2014, but probably at a slow pace.

As Khater noted, some of the "bounce back" in certain areas is probably over, also suggesting slower price increases going forward.  And investor buying appears to have slowed.  A positive for the market will probably be a little looser mortgage credit.

All of these factors suggest further prices increases in 2014, but at a slower rate than in 2013.   There tends to be some momentum for house prices, and I expect we will see prices up mid-to-high single digits (percentage) in 2014 as measured by Case-Shiller.

Here are the ten questions for 2014 and a few predictions:
Question #1 for 2014: How much will the economy grow in 2014?
Question #2 for 2014: How many payroll jobs will be added in 2014?
Question #3 for 2014: What will the unemployment rate be in December 2014?
Question #4 for 2014: Will too much inflation be a concern in 2014?
Question #5 for 2014: Monetary Policy: Will the Fed end QE3 in 2014?
Question #6 for 2014: How much will Residential Investment increase?
Question #7 for 2014: What will happen with house prices in 2014?
Question #8 for 2014: Housing Credit: Will we see easier mortgage lending in 2014?
Question #9 for 2014: How much will housing inventory increase in 2014?
Question #10 for 2014: Downside Risks